Improving Performance Measurement Systems: The Effect of Rotation Policies on Managers' Reports about Distortion

Abstract

We examine whether rotation policies facilitate the extraction of information about distortion from business unit managers. Results of our laboratory experiment show that firms with rotation policies compensate business unit managers less for reported information about distortion in their business unit. Next to this compensation effect, we also find that the prospect of being rotated causes business unit managers to report more information about distortion in their business unit. The reporting effect is consistent with our prediction rooted in other-regarding preferences models that the prospect of rotation causes business unit managers to base their reporting decision more on the welfare implications for the firm and less on the implications for their personal welfare. Our findings enrich the trade-off firms make when deciding about the implementation of rotation policies.

Keywords: rotation, reporting, information asymmetry, distortion, performance measurement systems

JEL Classification: D91, C92, M40, M41, M54